Prime Academy 46 th Session - FINAL - Progress Test Advanced Management Accounting No. of pages: 4 Total Marks: 75 Time allowed: 2 hrs PART - A

Transcription

1 Prime Academy 46 th Session - FINAL - Progress Test Advanced Management Accounting No. of pages: 4 Total Marks: 75 Time allowed: 2 hrs PART - A All questions are compulsory. Each question carries 5 Marks 1) A Company sells a product at `25/- per unit. It has a capacity of 1500 units. Up to 500 units the variable cost is `20/- p.u. thereafter it is noticed that variable cost increase `3/- every additional 200 units. The general fixed cost for the company is `2000/-. You are required to comment on the breakeven point as well as the optimal profitability? 2) A company produces two products A and B. It is noticed that the overall breakeven volume does not change for any given sales mix. What is your conclusion regarding Sales Mix, Sales value, Fixed Cost and Breakeven sales value? 3) The cost structure of an article the selling price of which is ` 45,000 is as follows Direct Material 50% Direct Labour 20% Overheads 30% An increase of 15% in the cost of materials and 25% in the cost of labour is anticipated. These increased costs in relation to the present selling price would cause a 25% decrease in the amount of present profit per article. You are required: i. To prepare a statement of profit per article at present, and ii. The revised selling price to produce the same percentage of profit to sales as before. 4) Following is the data regarding X Ltd Month Sales Total Cost ` ` January 140, ,000 February 154, ,000 March 170, ,000 Calculate the Break-even Sales value and the profit for the month of April if the sales value is `160,000. 5) The present turnover of a company is `10000 its variable cost is `6000 and fixed costs is `2000.The Company wants to reduce its Margin of Safety to 40%. Assuming independency of each component list down the various possibilities of achieving the same. Indicate the values accordingly. PRIME/46 th PT/FINAL 1

2 PART - B Answer Question No 1 and any 2 from Question 2, 3 and 4. 1) K Ltd. manufactures and sells a range of sports goods. Management is considering a proposal for an advertising campaign which would cost the company ` 3,00,000. The marketing department has put forward the following two alternative sales budgets for the following year: Products ( 000 units) A B C D Budget-1-without advertising Budget-2-with advertising Selling prices and variable production costs are budgeted as follows: Products (` Per unit) A B C D Selling Prices Variable Production Costs: Direct material Direct labour Variable overheads Other Data: (1) The variable overheads are absorbed on a machine hour basis at a rate of `1.20 per machine hour. (2) Fixed overheads total ` 30,84,000 per annum (3) Production capacity during the budget period 8,15,000 machine hours (4) Products A and C could be bought in at ` per unit and ` per unit respectively Require: (i) Determine whether investment in the advertising campaign would be worthwhile and how production facilities would be best utilized. (ii) Explain the assumptions and reasoning behind your advice. 2) A company manufactures three products from an intermediate produced in its own plant. The downstream unit at full capacity operations require one lakh kilos of intermediate. However in view of certain constraints, this output would be affected by 25%. Intermediate is charged to user division at `10 per kilo inclusive of its variable cost of `8 per kg. Following particulars are furnished A B C Downstream units Capacity (Units) 60,000 40,000 20,000 Intermediate required (Kgs) 66,000 20,000 14,000 Variable Cost (`/Unit) Fixed Cost (`/Unit) Profit (`/Unit) Total Price (`/Unit) PRIME/46 th PT/FINAL 2

3 It is further given that: (a) Constraints would prevail throughout the year and no other arrangement is possible to meet shortage; (b) Company had an opening stock of 7,500 kgs and minimum stock of 2,500 kgs has to be maintained in any case; and (c) For economic operations plants have to be operated at a minimum of 70% capacity. Required (i) To suggest the most profitable mix (ii) To compute the loss suffered as a result of main plant operating at 75% capacity and (iii) To re-fix the price of the products so as to retain the same profit. 3) Sanskrit Academy conducts a special course on "Speak Sanskrit" for a month during summer. At the end of the course an examination will be held for granting the certificate. Each candidate is charged a moderate fee of `50/- for taking up the exam. The following data was gathered for the past two years. SANSKRIT ACADEMY Statement of Net Revenue from the Entrance Test for the course on "Speak Sanskrit" (` in 000's) Gross Revenue (Fees collected) Valuation Question booklets Hall Rent 6 6 Supervision charges (One Supervisor for every 100 candidates) 4 6 General Administration Expenses Net revenue You are required (a) It is estimated that 6,000 candidates will take up the exam in Compute the Break even number of candidates assuming the maximum hall capacity to be 6000 (b) Assuming the maximum capacity of the hall to be 5000 candidates and an additional hall can be rented for ` 2450 to accommodate the balance 1000 students, how does the BEP modify. 4) ABC Ltd. manufactures and markets 2 products A and B, the demand in the market of which fluctuates with the prices quoted. As a result of the deliberations of its recent Sales Conference the following data were agreed upon as a working bases: Product A B Selling Price per unit(`) Expected demand per month(nos) labour hours are required to product A and 4 labour hours to product B and the maximum capacity of the factory is restricted to 20,000 labour hours per month. PRIME/46 th PT/FINAL 3

4 The cost structure per unit of production is as under: Product A B ` ` Direct material 8 6 Direct labour Variable overheads Fixed overheads are `60000/- per quarter. You are required i. To compute the possible combinations and arrive at a proper price mix for maximum profitability. ii. To compute the Break Even volume at the optimal level PRIME/46 th PT/FINAL 4

5 46 th SESSION - FINAL PROGRESS TEST ADVANCED MANAGEMENT ACCOUNTING - SUGGESTED ANSWERS PART - A 1. Range Numbers Selling Price Variable cost Contribution per unit Total cost Fixed cost Profit First Break Even Point = 2000/5 = 400 units Second Break even point = 900+(700/4) = 1075 units 2. The overall break even volume will not change for any given sales mix if the absolute contribution per unit for both the products are equal. Any change in sales mix will not change the average contribution as regards value it will change if the PV Ratio of the products is different, if the PV Ratio are equal then the overall break even sales value will not change. Fixed cost remains constant throughout the relevant range. The constant overall break-even sales volume may have a different overall break-even sales value when the sales mix is changed. 3. Let X be the cost and Y be the profit. Therefore X + Y = 45,000 Particulars Existing Cost Revised Cost Materials 0.5 X X Labour 0.2 X 0.25 X Overheads 0.3 X 0.3 X Total X 1.125X Revised Equation X Y = 45,000 Solving for X and Y, X = 2Y. Therefore current cost = ` 30,000 and Profit is ` 15,000 Revised cost is ` 33,750 Therefore revised selling price will be ` 33, ,875 = ` 50, Applying High Low method, the variable cost % will be as follows ( )/( ) = 15000/30000 = 50% Hence fixed cost = ( % of ) or ( % of ) = `42,000 Break even sales value = Fixed cost / PV Ratio = 42000/50% = `84,000. PRIME/46 th PT/FINAL 1

6 When Sales Value is `160000, Contribution equals `80000 and Profit = Contribution Fixed Cost = `80000 `42000 = ` Reduction of Margin of Safety can be achieved by the following measures 1. Reduction in selling price 2. Increase in Variable Cost 3. Increase in Fixed Cost 4. Decrease in Volume Existing 1.Reduction in selling price 2. Increase in Variable Cost 3. Increase in Fixed Cost 4.Decrease in Volume Sales 10, x x Variable Cost 6, x x Contribution 4, x 4000-x x Fixed Cost 2, x 2000 Profit 2, x 2000-x 2000-x 0.4x x/4000-x = x/4000-x = x/4000 = x-2000/0.4x = x= x 2000-x= x x = x-2000 = 0.16x 0.6x = x = x=2000 x = x = x = 400 x=8333 PRIME/46 th PT/FINAL 2

7 PART - B 1. Statements of products ranking and machine hours required under Budget 1 and Budget 2 Products A B C D Total Selling price per unit (`) Less: Variable cost p.u. (`) Contribution p.u. (`) Time in machine (H`) Contribution per machine hour (`) (0.72/1.20) (0.72/1.20) (1.20/1.20) (1.08/1.20) Ranking IV I III II Budget 1 (M. h`) (without 1,29,600 2,01,600 3,12,000 1,62,000 8,05,200 Advt.) Budget 2 (M. h`) (with Advt.) 1,44,000 2,23,200 3,42,000 1,78,200 8,87,400 Available budget hours viz. 8,15,000 hours are sufficient for Budget 1. However there is a shortfall of 72,400 hours (8,87,400-8,15,000) to meet Budget 2, targets. This additional machine hours requirement may be by way of purchasing either additional units of product A or C, so that the extra cost of buying machine hours is minimum. Products A C Additional buying in cost p.u. (`) (`10.68-` 7.80) (` ` 19.80) Additional buying cost p.u. per machine (` 2.88/0.6) (`4.80/1 hr) Since additional buying cost per machine hour same in the case of product C, therefore any of the products can be purchased and thus meet fully the gap in the machine hours requirement i.e., 72,400. The extra cost of buying 72,400 machine hours would come to `3,47,520 (72,400 * `4.80) PRIME/46 th PT/FINAL 3

8 Evaluation of Investment in Advertisement campaign ` 000 Products A B C D Total ` 000 Additional sales volume ( 000 units): (A) Unit contribution (` 000): (B) Additional Contribution (` 000): (B*A) Less: Extra machine buying cost (` 000) Less: Cost of Advertisement (` 000) Additional Profit (7.08) The generation of loss clearly shows that the investment in advertisement campaign is not worthwhile. Statement of production facilities utilisation Products Machines hours utilized ` A 1,44,000 B 2,23,200 C 2,69,600 D 1,78,200 Total 8,15,000 (ii) Assumptions: 1. Fixed costs (other than advertising) will remain unchanged. 2. Variable cost has linear relationship with the volume of production. 3. Prices and efficiency will remain unchanged at all levels of output. 4. Sales estimates are sound. Reasoning: The reasoning behind the above advice is based on the fact that the additional revenue does not exceed the additional relevant costs on buying product C or A. PRIME/46 th PT/FINAL 4

9 2. Particulars A B C Computation of Input Ratio per unit of Output 100% (Units) 60,000 40,000 20,000 Intermediate Required (Kgs) 66,000 20,000 14,000 Intermediate Ratio to Finished Product (Kg) Computation of Contribution and Ranking Selling Price Per unit Less: Variable Cost Contribution per unit Intermediate Input Ratio per unit Contribution/kg of Intermediate Ranking Total Quantity of Intermediate available From Opening Stock 5,000 75% Capacity 75,000 80,000 Allocation of Intermediate For Minimum Quantity of Output - 70% 46,200 14,000 9,800 70,000 Additional - Based on Ranking - 6,000 4,000 10,000 Total Quantity of Intermediate allocated 46,200 20,000 13,800 80,000 Output 42,000 40,000 19, ,714 Maximum Output Expected 60,000 40,000 20, ,000 Shortfall 18, ,286 Opportunity Loss - Contribution/Unit 6 7 Total Opportunity Loss 108,000 2, ,000 Loss on Intermediate x2 50,000 Total Loss 160,000 Upward revision of prices to eliminate loss and retain the same profit. Loss as per above ` Total intermediate Product Kgs Loss per Kg Rs2 This loss will be recovered on the basis of consumption norms for different products. The revised price would be as under Products Existing Price Increase Revised Price A x B x 2 16 C x PRIME/46 th PT/FINAL 5

10 3. Selling Price per unit `50 Note 1: Number of Candidates Gross Revenue 1,00,000 1,50,000 No of Students = (Gross Revenue/ `50) Note 2: Variable Costs per Student Valuation = 40,000/2000 = ` 20 Per Student (Also = 60000/3000) Book lets = 30000/2000 = ` 15 per Student (Also = 45000/3000) `35 Note 3: Fixed Costs Hall Rent `6,000 Administration = `9000 Total = `15,000 Note 4: Step Fixed Costs Supervisor Salary for 2000 candidates = `4000 Supervisor Salary for 100 candidates = `200 No of Supervisors per 100 candidates = 1 person Salary per supervisor = `200/- Supervisor Salary per student = 200/100 = `2 Note 5: Break Even Point Contribution per student before specific fixed costs = `15 Step fixed costs student = ` 2 Contribution for the purpose of BEP Range `13 Tentative BEP = ` 15000/13 = 1153 BEP range = 1101 to 1200 Fixed Costs at above = X 12 Supervisors = `17400 BEP = 17400/15 = 1160 Students. Case (B) On hiring the new hall the cost of both the halls taken together becomes a fixed cost Hence Tentative BEP = = `17450/13 = 1343 BEP range = 1301 to 1400 Fixed Costs at above = X 14 Supervisors = `20250 BEP = 20250/15 = PRIME/46 th PT/FINAL 6

11 4. PRODUCT A B Selling price per unit(`) Expected demand per month(no s) Total labour hours required Variable cost per unit(`) Contribution per unit(`) Contribution per hour(`) Total contribution(`) PRODUCTS CONTRIBUTION LABOUR HOURS A B ` REQUIRED Recommendation: The above combinations show that the maximum contribution of `24800 is possible at labour hours. Therefore, profitable price mix is A `56 and B `44. BREAK EVEN POINT (Value) Contribution at optimal level Sales at optimal level=(56 x 1500) + (44 x 1600) =`1,54,400/- Break even point=(fixed cost/contribution) X Sales BEP=(20000/49600) X =`62,258/- PRIME/46 th PT/FINAL 7

12 Prime Academy 46 th Session - Final - Progress Test Direct Tax No. of pages: 4 Total Marks: 75 Time allowed: 2 hrs PART-A 1. The condition of reasonable certainty of ultimate collection is not laid down for taxation of interest, royalty and dividend. Whether the taxpayer is obliged to account for such income even when the collection thereof is uncertain? (2 Marks) 2. Does ICDS apply to non-corporate taxpayers who are not required to maintain books of account and/or those who are covered by presumptive scheme of taxation like sections 44AD, 44AE, 44ADA, 44B, 44BB, 44BBA, etc. of the Act? (2 Marks) 3. Para 8 of ICDS-V states expenditure incurred on commissioning of project, including expenditure incurred on test runs and experimental production shall be capitalized. It also states that expenditure incurred after the plant has begun commercial production i.e., production intended for sale or captive consumption shall be treated as revenue expenditure. What shall be the treatment of expense incurred after the conduct of test runs and experimental production but before commencement of commercial production? (2 Marks) 4. There are specific provisions in the Act read with Rules under which a portion of borrowing cost may get disallowed under sections like 14A, 43B, 40(a)(i), 40(a)(ii), 40A(2)(b), etc. of the Act. Whether borrowing costs to be capitalized under ICDS-IX should exclude portion of borrowing costs which gets disallowed under such specific provisions? (2 Marks) 5. Compute the tax liability for the assessment year for the following assesses: a) Mr. Raja aged 82 income earning of INR 13,75,398 b) Mrs. Aishwarya aged 25 income earning of INR 103,55,198 c) Y Ltd. Taxable income is 3,89,28,178. Turnover is 4,95,00,000 d) Mr. Vijay aged 38 having income of 11,23,900 (income from lottery) (8 Marks) 6. A. Profit on sale of shares of an Indian company received in Australia is taxable in case of a) resident and ordinarily resident only b) resident but not ordinarily resident c) non-resident d) All the above (1 Mark) B. A company, other than an Indian company, would be a resident in India for the P.Y if, during that year, a) its Place of Effective Management is in India. b) its control and management is wholly in India. c) it control and management is partly in India. d) majority of its directors are resident in India (1 Mark) PRIME/46 th PT/FINAL 1

13 C. The surcharge applicable to a domestic company for A.Y is - a) 5%, if total income exceeds INR 1 crore. b) 10%, if the total income exceeds INR 1 crore c) 7%, if the total income exceeds INR 1 crore but does not exceed INR 10 crore, and 15%, if the total income exceeds INR 10 crore. d) 7%, if the total income exceeds INR 1 crore but does not exceed INR 10 crore, and 12%, if the total income exceeds INR 10 crore. (1 Mark) D. The rates of income tax are mentioned in - a) The Income-tax Act, 1961 only b) The Annual Finance Act c) Both in the Income-tax Act, 1961 and the Annual Finance Act d) Income-tax Rules, (1 Mark) 7. From the following particulars of income furnished by Mr. Anirudh pertaining to the year ended , compute the total income for the assessment year , if he is: (i) Resident and ordinary resident; (ii) Resident but not ordinarily resident; (iii) Non-resident Sl. No. Particulars Amount Rs. 1 Short term capital gain on sale of shares in Indian Company received 15,000 in Germany 2 Dividend from a Japanese Company received in Japan 10,000 3 Rent from property in London deposited in a bank in London, later 75,000 on remitted to India through approved banking channels Dividend from RP Ltd., an Indian Company 6,000 Agricultural income from lands in Gujarat 25,000 (5 Marks) PART-B 1. S.No. Particulars INR 1. Purchase price of raw material used for the purpose of in-house research and development 11,80, Purchase price of asset used for in-house research and development wrongly debited to profit and loss account: (1) Land 5,00,000 (2) Building 3,00, Expenditure incurred on notified agricultural extension project 25,50, Expenditure on notified skill development project: (1) Purchase of land 40,00,000 (2) Expenditure on training for skill development 32,50, Expenditure incurred on advertisement in the souvenir published by a political party 75,000 Compute the income under the head Profits and gains of business or profession for the A.Y of Isac Ltd. (7 Marks) PRIME/46 th PT/FINAL 2

14 2. Examine critically the following cases in the context of provisions contained in the Income-tax Act, 1961 relevant for Assessment Year Support the answers with relevant case laws and workings. (a) Mr. Janak is proprietor of M/s. Yash Texnit which is engaged in garment manufacturing business. The entire block of Plant & Machinery chargeable to 15%, has 20 different machinery items as at One of the machineries used for packing had become obsolete and was discarded by Mr. Janak in July 17. Assesse filed its return for A.Y claiming total depreciation of INR 40 lacs which includes INR 4 lacs being the depreciation claimed on the machinery item discarded by Mr. Janak. The A.O. disallowed the claim of depreciation of INR 4 lacs during the course of scrutiny assessment. Comment on the validity of action taken by A.O. (b) X. Ltd. issued debentures in the previous year , which were to be matured at the end of 5 years. The debenture holder was given an option of one time upfront payment of INR 60 per debenture on account of interest which was to be immediately paid by the company. As per the option exercised by the debenture holders, company paid interest upfront to them in the first year itself and the same was claimed as deduction in the return of the company. But in the accounts, the interest expenditure was shown as deferred expenditure to be written off over a period of 5 years. During the course of assessment, the Assessing Officer spread the upfront interest paid over a period of five year term of debentures and allowed only one-fifth of the amount in the previous year Examine the correctness of the action of Assessing Officer. (8 Marks) 3. Compute the gross total income of Mr. F for the A.Y from the information given below Particulars INR Net income from house property 1,25,000 Income from business (before providing for depreciation) 1,35,000 Short term capital gains on sale of shares 56,000 Long term capital loss from sale of property (brought forward from (90,000) A.Y ) Income from tea business 1,20,000 Dividends from Indian companies carrying on agricultural operations 80,000 Current year depreciation 26,000 Brought forward business loss (loss incurred six years ago) (45,000) (5 Marks) 4. Mrs. E, wife of Mr. F, is a partner in a firm. Her capital contribution to the firm as on was INR 5 lacs, out of which INR 3 lacs was contributed out of her own sources and INR 2 lacs was contributed out of gift from her husband. As further capital was needed by the firm, she further invested INR 2 lacs on out of the funds gifted by her husband. The firm paid interest on capital of INR 80,000 and share of profit of INR 60,000 for the financial year Advise Mr. F as to the applicability of the provisions of section 64(1) (iv) and the manner thereof in respect of the above referred transactions. (5 Marks) 5. As per agreement between S Limited a company incorporated in Korea and Bharti Motors Limited an Indian company, S limited both off-shore and on-shore technical services to Bharti Motors Limited for setting up a car manufacturing plant in Gujarat. S Limited rendered off-shore service and on-shore service at a fee of INR 2 crore and INR 3 crore, respectively. S Limited claims that it is not liable to tax in India in respect of fee of INR 2 crore as it is for rendering services outside India. Is the view taken by S Limited correct? (4 Marks) PRIME/46 th PT/FINAL 3

15 6. During the previous year , Ms. Indu, a citizen of India is a resident of both India and a foreign country with which India has a Double Tax Avoidance Agreement (DTAA), which provides that the income would be taxable in country where it is earned and not in other country, but would be included for computation of tax rate in such other country. Her income is INR 3, 25,000 from business in India and INR 6, 00,000 from business in foreign country, in foreign country, the rate of tax is 20% During the year, she paid a premium of INR 32,000 to insure the health of her mother, a non-resident, aged 82 years, not dependent on her, through her credit card. (i) Compute the tax payable by Ms. Indu in India for the A.Y (ii) Also, show the tax payable by Ms. Indu in India, had there been no DTAA with such foreign country. (6 Marks) 7. MNO Ltd., a listed company, wanted some credit facilities from the bank for its business purpose. The bank insisted on personal guarantee of the directors as a precondition for providing financial assistance to the company. The directors were employees of the company who were drawing salary from the company. A resolution was passed for paying commission to the directors and a sum of INR lakhs each was paid as commission calculated at the rate of 1.5% of the principal sum, in respect of which personal guarantee was furnished by the directors to the bank. The assessed claimed the expenses as business expenditure. But applying section 36(1)(ii), the Assessing Officer held that if the amount was not paid to them as commission, the same would have been payable as dividend and contended that the assesse avoided dividend distribution tax under section 115-O which was otherwise payable. Is the action of the Assessing Officer valid? (5 Marks) 8. ST & Co., a partnership firm, was dissolved and as per the dissolution deed of the partnership firm, with effect from 18th September, 2004, S, one of the partners of erstwhile firm took over the entire business of the partnership firm in his individual capacity including fixed assets, current assets and liabilities and the other partner was paid his dues. He then continued the business as a sole proprietor with effect from that date. The assesse, relying upon section 78(2), claimed the setoff of the losses suffered by the erstwhile partnership firm against his income earned as an individual proprietor, considering the case as inheritance of business. The claim of the assesse was disallowed by the Assessing Officer. Examine the correctness of the action of the Assessing Officer. (5 Marks) 9. Smith, a foreign national and a cricketer came to India as a member of Australian cricket team in the year ended 31st March, He received INR 5 lakhs for participation in matches in India. He also received INR 1 lakh for an advertisement of a product on TV. He contributed articles in a newspaper for which he received INR 10,000.When he stayed in India; he also won a prize of INR 20,000 from horse racing in Mumbai. He has no other income in India during the year. (i) Compute tax liability of Smith for Assessment Year (ii) Are the income specified above subject to deduction of tax at source? (iii) Is he liable to file his return of income for Assessment Year ? (iv) What would have been his tax liability, had he been a match referee instead of a cricketer? (5 Marks) PRIME/46 th PT/FINAL 4

16 46 th SESSION - FINAL PROGRESS TEST DIRECT TAX LAW - SUGGESTED ANSWERS PART A 1. As a principle, interest accrues on time basis and royalty accrues on the basis of contractual terms. Subsequent non-recovery in either cases can be claimed as deduction in view of amendment to section 36(1)(vii). Further, the provision of the Act (e.g. Section 43D) shall prevail over the provisions of ICDS. 2. ICDS is applicable to specified persons having income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources'. Therefore, the relevant provisions of ICDS shall also apply to the persons computing income under the relevant presumptive taxation scheme. For example, for computing presumptive income of a partnership firm under section 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue recognition shall apply for determining the receipts or turnover, as the case may be. 3. As clarified in Para 8 of lcds-v, the expenditure incurred till the plant has begun commercial production, that is, production intended for sale or captive consumption, shall be treated as capital expenditure. 4. Since specific provisions of the Act override the provisions of ICDS, it is clarified that borrowing costs to be considered for capitalization under ICDS IX shall exclude those borrowing costs which are disallowed under specific provisions of the Act. Capitalization of borrowing cost shall apply for that portion of the borrowing cost which is otherwise allowable as deduction under the Act. 5. Compute the tax liability for the assessment year for the following assesses: a. Mr. Raja aged 82 income earning of INR 13,75,398 Tax amount: INR 212,619 Education 2% INR 4,252 S H Education 1% INR 2,126 Total Liability INR 218,997 b. Mrs. Aishwarya aged 25 income earning of INR 103,55,198 Tax amount: INR 29,19,059 Surcharge: INR 4,37,859 Education 2% INR 67,138 S H Education 1% INR 33,569 Total Liability INR 34,57,625 c. Y Ltd. Taxable income is 3,89,28,178. Turnover is 4,95,00,000 Tax 25%: INR 97,32,045 Surcharge: INR 6,81, 243 Education 2% INR 2,08,266 S H Education 1% INR 1,04,133 Total Liability INR 107,25,687 d. Mr. Vijay aged 38 having income of 11,23,900 (income from lottery) Tax amount: INR 3,37,170 Education 2% INR 6,743 S H Education 1% INR 3,372 Total Liability INR 3,47, a) (d) All the above b) (a) its Place of Effective Management is in India. c) (d) 7%, if the total income exceeds INR 1 crore but does not exceed INR 10 crore, and 12%, if the total income exceeds INR 10 crore. d) (c) Both in the Income-tax Act, 1961 and the Annual Finance Act PRIME/46 th PT/FINAL 1

17 7. Computation of total income of Mr. Anirudh for the A.Y Sl. Particulars Resident & No. ordinarily resident 1 Short term capital gain on sale of shares in Indian Company received in Germany 2 Dividend from a Japanese Company received in Japan 3 Rent from property in London deposited in a bank in London, later on remitted to India through approved banking channels [See Note (i) below] 4 Dividend from RP Ltd., an Indian Company [See Note (ii) below] 5 Agricultural income from lands in Gujarat [See Note (iii) below] Resident but not ordinarily resident Non- Resident 15,000 15,000 15,000 10, , Total Income 77,500 15,000 15,000 Notes: (i) It has been assumed that the rental income is the gross annual value of the property. Therefore, under section 24, has been provided and the net income so computed is taken into account for determining the total income of a resident and ordinarily resident. Rent received (assumed as gross annual value) INR 75,000 Less: Deduction under section 24 (30% of INR 75,000) INR 22,500 Income from house property INR 52,500 (ii) Dividend from Indian company is exempt under section 10(34). (iii) Agricultural income is exempt under section 10(1). (5 Marks) PART-B 1. Computation of income under the head Profits and gains of business or Profession for the A.Y Particulars INR INR Net profit as per profit and loss account 35,25,890 Add: Items debited to profit and loss account, but to be disallowed Purchase price of Land used in in-house research and 5,00,000 development being capital expenditure not allowable as deduction under section 35 Purchase price of building used in in-house research and development being capital expenditure, 100% of which is allowable as deduction u/s 35(1)(iv) read with section 35(2) Expenditure incurred on notified agricultural extension project (to be treated separately) Expenditure incurred on notified skill development project - Purchase of land - being capital expenditure not qualifying for deduction under section 35CCD - 25,50,000 40,00,000 PRIME/46 th PT/FINAL 2

18 Less: Expenditure incurred on notified skill development project - Expenditure on training for skill development (to be treated separately) Expenditure incurred on advertisement in the souvenir published by a political party not allowed as deduction as per section 37(2B) Purchase price of raw material used for in-house research and development qualifies for 150% deduction under section 35(2AB). Since, it is already debited to profit and loss account balance 50% is allowed. 32,50,000 75,000 1,03,75,000 1,39,00,890 5,90,000 Less: Less: Expenditure incurred on notified agricultural extension project qualifies for 150% deduction under section 35CCC. PRIME/46 th PT/FINAL 3 38,25,000 Expenditure incurred on training for skill development in a 48,75,000 92,90,000 notified skill development project qualifies for 150% deduction under section 35CCD. Profit and gains from business 46,10,890 Note: The expenditure incurred on advertisement in the souvenir published by a political party is disallowed as per section 37 (2B) while computing income under the head Profit and Gains of Business or Profession but the same would be allowed as deduction under sections 80GGB from the gross total income of the company. 2. (a) The issue under consideration is whether disallowance of depreciation made by the Assessing Officer with regard to the discarded asset, in arriving at the written down value of the block of assets, is justified. One of the conditions for claim of depreciation under section 32 is that the eligible asset must have been put to use for the purpose of business or profession. The other aspect to considered is whether merely discarding an obsolete machinery, which is physically available, will attract the expression moneys payable appearing in section 43(6), so as to deduct its value from the written down value of the block. The facts in the present case are similar to facts in the case of CIT v. Yamaha Motor India Pvt. Ltd. (2010) 328 ITR 297, wherein the Delhi High Court observed that the expression"used for the purposes of the business" in section 32 when used with respect to discarded machinery would mean the use in the business, not only in the relevant financial year/previous year, but also in the earlier financial years. The discarded machinery may not be actually used in the relevant previous year but depreciation can be claimed as long as it was used for the purposes of business in the earlier years provided the block continues to exist in the relevant previous year. Therefore, the condition for claiming depreciation in respect of the discarded machine would be satisfied if it was used in the earlier previous years for the business. For the purpose of section 43(6), moneys payable means the sale price, in case of sale, or the insurance, salvage or compensation moneys payable in respect of the asset. In this case, the machinery has not been sold as machinery or scrap or disposed off, and it continues to exist. Hence, there is no moneys payable in this case, which alone is deductible while computing the WDV of the block to which it belongs. Applying the rationale of the above case, the action of the Assessing Officer in disallowing ` 4 lakhs, being the depreciation claim attributable to discarded machinery, on the ground that the same was not put to use in the relevant previous year, is invalid, since the said machinery was put to use in the earlier previous years.

19 (b) The issue under consideration is whether, in a case where debentures are issued with maturity at the end of five years, and the debenture holders are given an option of upfront payment of interest in the first year itself, can the entire upfront interest paid, be claimed as deduction by the company in the first year or should the same be deferred over a period of five years; and would the treatment of such interest as deferred revenue expenditure in the books of account have any impact on the tax treatment. The facts of the case are similar to the facts in Taparia Tools Ltd. v. JCIT (2015) 372 ITR 605, wherein the above issue came up before the Supreme Court. In that case, it was observed that under section 36(1)(iii), the amount of interest paid in respect of capital borrowed for the purposes of business or profession, is allowable as deduction. The moment the option for upfront payment was exercised by the subscriber, the liability of X Ltd. to make the payment in that year had arisen. Not only had the liability arisen in the previous year in question, it was even quantified and discharged as well in that very year. As per the rationale of the Supreme Court ruling in Taparia Tools Ltd. s case, when the deduction of entire upfront payment of interest is allowable as per the Income-tax Act, 1961, the fact that a different treatment was given in the books of account could not be a factor which would bar the company from claiming the entire expenditure as a deduction. Accordingly, the action of the Assessing Officer in spreading the upfront interest paid over the five year term of debentures and restricting the deduction in the P.Y to one-fifth of the upfront interest paid is not correct. The company is eligible to claim the entire amount of interest paid upfront as deduction under section 36(1)(iii) in the P.Y Particulars INR INR Income from house property 1,25,000 Income from business Profits before depreciation 1,35,000 Less: Current year depression 26,000 Less: Brought forward business loss 45,000 64,000 Income from tea business(40% business 48,000 1,12,000 income) Income from the capital gains Short term capital gains 56,000 Gross Total Income 2,93,000 Notes: (1) Dividend from Indian companies of INR 80,000 is exempt from tax under section 10(34). (2) 60% of the income from tea business is treated as agricultural income and therefore, exempt from tax; (3) Long-term capital loss can be set-off only against long-term capital gains. Therefore, long- term capital loss of INR 90,000 brought forward from A.Y cannot be set-off in the A.Y It has to be carried forward for set-off against long-term capital gains, if any, during A.Y As per section 64(1)(iv), in computing the total income of any individual, there shall be included all such income as arises, directly or indirectly, subject to the provisions of section 27(i), to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart. In this instant case, Mr. F has gifted money to his wife, Mrs. E. Mrs. E, in turn, invested such gifted money in the capital of a partnership firm, of which she is a partner. Mrs. E has also contributed a sum of ` 3 lacs out of her own resources to the capital of the firm. PRIME/46 th PT/FINAL 4

20 As per Explanation 3 to section 64(1), for the purpose of clubbing under section 64(1)(iv), where the assets transferred, directly or indirectly, by an individual to his spouse are invested by the transferee in the nature of contribution of capital as a partner in a firm, proportionate interest on capital will be clubbed with the income of the transferor. Such proportion has to be computed by taking into account the value of the aforesaid investment as on the first day of the previous year to the total investment by way of capital contribution as a partner in the firm as on that day. In view of the above provision, interest received by Mrs. E from the firm shall be included in total income of Mr. F to the extent of INR 32,000 i.e., INR 80,000 x INR 2, 00,000/INR 5,00,000. Share of profit amounting to INR 60,000 is exempt from income-tax under the provisions of section 10(2A). The provisions of section 64 will not apply, if the income from the transferred asset itself is exempt from tax. Note: It is assumed that rate of interest on capital contributed by Mrs. E does not exceed 12% p.a. 5. As per section 9(1)(vii), income by way of fees for technical services payable by a person who is a resident would be deemed to accrue or arise in India except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. As per Explanation below section 9(2), income by way of, inter alia, fees for technical services from services utilized in India would be deemed to accrue or arise in India undersection 9(1)(vii) in case of a non-resident and be included in his total income, whether or not such services were rendered in India. In this case, the technical services rendered by the foreign company, S Ltd., were for setting up a car manufacturing plant in Gujarat by Bharti Motors Ltd., an Indian company. Therefore, the services were utilized in India. Consequently, the fee of INR 5 crore for technical services rendered by S Ltd. (both off-shore and onshore services) to Bharati Motors Limited is deemed to accrue or arise in India and includible in the total income of S Ltd. Therefore, the view of S Ltd. that it is not liable to tax in India in respect of fee of INR 2 crore (as it is for rendering services outside India) is not correct. 6. (i) India has a DTAA with the Foreign Country Computation of Tax Payable by Ms. Indu for A.Y Particulars INR Income from business in India 3,25,000 Less: Deduction under Chapter VI-A Deduction under section 80D in respect of medical premium for mother to be restricted to(ms. Indu would not be entitled for deduction of INR 30,000 even if her mother is 82 years old, since the higher limit of deduction of INR 30,000 is available in respect of an resident of an individual who is of the age of 60 years or more and resident in India during the previous year) 25,000 Total Income 3,00,000 Income from business in the foreign country 6,00,000 9,00,000 Tax on Total Income INR Upto INR 2,50,000 Nil 2,50,000 to INR 5% 12,500 5,00,000 to INR 20% 80,000 92,500 Add: Education cess and 3% 2,775 Tax Payable 95,275 PRIME/46 th PT/FINAL 5

21 Average tax rate in India (95,275 x 100/9,00,000) 10.58% Tax liability As per DTAA with the foreign country, the income earned in foreign country would not be taxable in India, but it has to be included in the total income only for computation of tax rate. Accordingly, Ms. Indu would only be liable to pay tax on income earned in 10.58% and not on the foreign income. Indian Income included in total income = INR 3,25,000 25,000=3,00, % of INR 3,00,000(rounded off) 31,740 Note: In the above solution, the average rate of income-tax has been determined by dividing thr amount of income-tax computed on total income (including both Indian Income and foreign income), by such total income. Thereafter, the said rate has been applied on the Indian income included in total income for computing the tax liability of Ms.Indu. However, on a plain reading of the language of the DTAA as stated in the question, it is possible to take a view that the foreign income should be included for rate purposes for computing tax on Indian income in the manner specified in section 2(2) of the Finance Act, 2015 for computing of tax on nonagricultural income by including agricultural income for rate purpose alone. If this view is taken, the tax liability has to be computed s given hereunder: Particulars INR Tax on total Income of INR 9,00,000(Indian Income INR 3,00,000+Foreign Income INR 6,00,000) Upto INR 2,50,000 2,50,000 to INR 5% 5,00,000 to INR 20% Less: Tax on basis exemption limit + Foreign Income[i.e., INR 2,50, ,00,000] Tax on INR 8,50,000 Add: Education 3% Tax liability Nil 12,500 80,000 92,500 82,500 10, ,300 (ii) India has no DTAA with the Country Computation of Tax Payable by Ms. Indu for A.Y Tax on both Foreign and Indian Income (as computed in (i) above) Less: Relief under section 91 on foreign income of INR 10.58% [lower of (average) Indian-tax rate (10.58%) or foreign tax rate(20%)]would be allowed Tax Payable Tax Payable(rounded off) PRIME/46 th PT/FINAL 6 INR 95,275 63,480 31,795 31,800

22 Note: Where India does not have a DTAA with the foreign country, then an assessed shall be allowed relief under section 91 provided all the following condition are fulfilled:- (a) The assesse is a resident India during the relevant previous year. (b) The income accrues or arises to him outside India during that previous year. (c) Such income is not deemed to accrue in India during the previous year. (d) The income in question has been subjected to income tax in the foreign country in the hands of the assesse and the assesse has paid tax on such income in the foreign country. (e) There is no agreement under section 90 for the relief or avoidance of double taxation between India and the other country where the income has accrued or arisen. In case (ii) above where India does not have a DTAA with the foreign country. Ms. Indu would be eligible for deduction under section 91, since all the above condition are satisfied. 7. The issue under consideration in this case is whether guarantee commission paid by a company to its employee directors is deductible as its business expenditure, where such guarantee was given by the employee directors to the bank for enabling credit facility to the company, and whether it can be contended that the same would have been payable as dividend had it not been paid as commission. In the absence of any specific disallowance, an expenditure incurred wholly and exclusively for the purpose of business has to be allowed under section 37. It has also to be seen whether such payment was a device used to outwit the provisions of section 115-O, which requires payment of dividend distribution tax. The directors of the company are employees of the company and are entitled to remuneration for the services rendered as employees. In this case, they also provided personal guarantee to banks, since it was a pre-condition laid down by the bank to provide financial assistance to the company. This act of providing personal guarantee was clearly beyond the scope of their services as employees of the company. The assessee-company, in its commercial wisdom, had passed a resolution resolving that the directors be paid commission for providing their personal guarantees for the financial assistance availed by the assessee-company from the bank. In such a case, the Assessing Officer only has to determine whether the transactions are real and genuine. Further, as regards section 36(1)(ii), the recipient directors were not entitled to receive the amount as commission in lieu of dividend. Dividend is paid to all the shareholders and the recipient directors were not the only shareholders of the company. The payment of commission, hence, cannot be taken as payment of dividend, since payment of dividend would result in payment to all the shareholders and not to select shareholders It was so held by the Delhi High Court, in Controls & Switchgear Contractors Ltd v. Dy. CIT (2014) 365 ITR 312. Therefore, the action of the Assessing Officer, holding that if the amount was not paid to them as commission, the same would have been payable as dividend, and contending that the company avoided dividend distribution tax under section 115-O which was otherwise payable, is not valid. 8. The issue under consideration in this case is whether the loss suffered by an erstwhile partnership firm, which was dissolved, can be carried forward for set-off by the individual partner who took over the business of the firm as a sole proprietor, considering the succession as a succession by inheritance Section 78(2) deals with carry forward of losses in case of succession of business. It provides that only the person who has incurred the losses, and no one else, would be entitled to carry forward the same and set it off. An exception provided thereunder is in the case of succession by inheritance. Upon dissolution, the partnership firm, ST & Co. ceased to exist. Also, the partnership firm, ST & Co. and the sole proprietorship concern are two separate and distinct units for the purpose of assessment. PRIME/46 th PT/FINAL 7

23 The income earned by the sole proprietor would include his share of loss as an individual but not the loss suffered by the erstwhile partnership firm in which he was a partner. The exception given in section 78(2), permitting carry forward of losses by the successor in case of inheritance, is not applicable in the present case since the partnership firm was dissolved and ceased to continue. Taking over of business by a partner cannot be considered as a case of inheritance due to death as per the law of succession. It was so held by the Delhi High Court in Pramod Mittal v. CIT (2013) 356 ITR 456. Therefore, the action of the Assessing Officer in disallowing the claim of set-off of losses suffered by the erstwhile partnership firm ST & Co. against the income earned as an individual proprietor is correct. 9. (i) Particulars INR INR Income taxable under section 115BBA Income from participation in matches in 5,00,000 India Advertisement of product on TV 1,00,000 Contribution of articles in newspaper 10,000 Income taxable under section 115BB Income from horse races 20,000 Total income 6,30,000 Tax@ 20% under section 115BBA on INR 1,22,000 6,10,000 Tax@ 30% under section 115BB on income 6,000 of INR 20,000 from horse races 1,28,000 Add: Education cess@ 2% and SHEC@ 1% 3,840 Total tax liability of smith for the A.Y ,31, (ii) Yes, the above income is subject to tax deduction at source. Income referred to in section 115BBA (i.e., INR 6, 10,000, in this case) is subject to tax deduction at source@ 20% under section 194E. Income referred to in section 115BB (i.e., INR 20,000, in this case) is subject to tax deduction at source@30% under section 194BB. Since Smith is a non-resident, the amount of tax to be deducted calculated at the prescribed rates mentioned above, would be increased by education cess@2% and secondary and higher education cess@1%. (iii) Section 115BBA provides that if the total income of the non-resident sportsman comprises of only income referred to in that section and tax deductible at source has been fully deducted, it shall not be necessary for him to file his return of income. However, in this case, Mr. Smith has income from horse races as well. Therefore, he cannot avail the benefit of exemption from filing of return of income as contained in section 115BBA. Hence, he would be liable to file his return of income for A.Y (iv) The Calcutta High Court in Indcom v. CIT (TDS)(2011) 335 ITR 485 has held that match referee would not fall within the meaning of sportsmen to attract the provisions of section 115BBA. Therefore, although the payments made to non-resident match referee are income which has accrued and arisen in India, the same are not taxable under the provisions of section 115BBA. They are subject to the normal rates of tax. PRIME/46 th PT/FINAL 8